TESTIMONY of

Stephen
MooreDirector of Fiscal Policy StudiesCato
Institute

Washington, D.C.

before
the

Budget CommitteeU.S. House of Representatives

Corporate Subsidies in the Federal
BudgetJune 30, 1999

Thank you Chairman Kasich for the opportunity to testify before the Budget
Committee on the issue of corporate welfare in the federal budget. And
thank you for your leadership on this vital issue of fiscal common sense.
You and a handful of other members on this Committee have been heroes on
this issue. You are among the few members of Congress who have made a
valiant effort to reduce federal taxpayers subsidies to business. Before I
begin my testimony, I will state for the record in accordance with the
Truth in Testimony requirement that neither I, nor the Cato Institute,
receive any government funding.

I have divided my testimony on corporate welfare into 7 observations
about the economic and political state of affairs regarding corporate
welfare. Then at the end of my testimony I provide 6 recommendations
regarding how Congress can reduce the size of the corporate welfare state.

1) Corporate welfare is a large and growing component of the federal
budget. America's most costly welfare recipients today are Fortune 500
companies. In 1997 the Fortune 500 corporations recorded best-ever
earnings of $325 billion, yet incredibly Uncle Sam doled out nearly $75
billion in taxpayer subsidies. These welfare payments come in every
conceivable shape and size, including government grants, contracts, cut
rate insurance, loans, and loan guarantees. There are roughly 125 such
business subsidy programs in the federal budget and they can be found in
virtually every cabinet agency of the government--including the Defense
Department.

Our latest survey of the corporate welfare subsidy programs finds that
in each of the past three years corporate welfare subsidies have
increased. although congressional Republicans had pledged an attack
against unwarranted business subsidies back in 1995, these programs have
actually expanded on average by almost 10 percent over the past 4 years.
Table 1 below
compares the budgets for about 60 of the most egregious examples of
corporate welfare in 1998 and 1999. Corporate subsidies were again up 2
percent in FY 1999. Table 2 shows that
President Clinton has recommended a gigantic 10 percent hike in corporate
welfare spending for FY2000.

Clearly, whatever strategies we have tried to employ to curtail
corporate welfare spending have not worked very successfully. New tactics
to take on the corporate beneficiaries of federal subsidies are
unquestionably necessary.

2) Almost all of the most egregious subsidies are in the forms of
federal expenditures, not tax loopholes. If Congress is serious about
weaning businesses from federal subsidies, it should concentrate on
eliminating the Departments of Commerce and Energy, the Export Import
Bank, the International Monetary Fund and the World Bank, farm subsidies,
and OPIC. These spending programs not only cost taxpayers money directly,
but also create an unhealthy corporate dependence on federal subsidies.
Yes, there are unfair provisions of the tax code that benefit some
businesses and industries more than others. Congress should overhaul the
entire income tax system and lower overall tax rates in exchange for
eliminating those unjustified tax breaks.

3) Many Fortune 500 companies are double and triple dippers. All but a
small handful of America's most profitable corporations have participated
in the hunt for federal or state government subsidies. Most of these
companies are double-, triple-, and quadruple-dipping. In 1996 General
Electric Co. won 15 grants for $20.1 million. Rockwell International
received 39 grants for $25.4 million. Westinghouse Electric Corp. received
14 grants for $26.1 million. Yet each of these companies had profits of at
least half a billion dollars that year.

4) There are no time limits for corporate welfare benefits. In the
mid-1990s Congress and the states--at the urging of the American
people--enacted major reforms in social welfare programs. There are now
time limits on welfare benefits. Work, training, or education is now
typically required in exchange for benefits. The result: welfare rolls are
down by 40 percent over the past five years and record levels of
former-recipients now working and paying taxes, not collecting them.

None of this reform ethic has taken root in the realm of corporate
welfare. There is no plan in Congress or the White House to attack
business subsidies. In fact, the business community has come to regard
subsidy payments as de facto entitlements. There is no "two years and off"
time limit when it comes to corporate hand-outs.

5) If all corporate welfare were eliminated, the savings would be large
enough to entirely eliminate the capital gains tax or the death tax.
Private industry recipients of corporate welfare typically boast of the
jobs that they create with their federal grant payments. It makes sense
that if Congress gives General Electric a cash payment, they may use those
dollars for socially useful purposes. But the real issue with corporate
welfare is what are the opportunity costs associated with the $75 billion
a year in corporate subsidies. Table 3 below shows a sample of the types
of pro-growth tax reduction initiatives that Congress could afford to
undertake without adding a penny to the federal debt, if corporate welfare
were entirely ended.

* We could cut the personal income tax, the corporate income tax, or
the payroll tax.

* We could entirely abolish the capital gains tax or the death tax.

* We could help finance a flat tax at a rate of 20 percent for all
Americans.

Those in the business community who contend that corporate subsidies
add to America's competitiveness and industrial might, must answer the
following question: Do you really believe that these programs add more
wealth, jobs, or venture financing for the American economy than would
entirely eliminating the capital gains tax or adopting a low-rate flat tax
that ends all punitive tax treatment of savings? Very few could honestly
answer that question in the affirmative.

Table 3

WHAT $75 BILLION IN ANNUAL CORPORATE WELFARE
SAVINGS WOULD BUY

Corporate Welfare Alternatives

Annual Cost

Eliminate Capital Gains Tax

$70 billion

Eliminate the Death Tax

$25 billion

Cut Corporate Tax from 35 percent to 25 percent

$65 billion

Cut All Personal Income Tax Rates by 10 Percent

$74 billion

Establish 20 Percent Flat Tax

$65 billion

3 Percentage Point Cut in Payroll Tax

$70 billion

Source: Budget of the United States Government, Fiscal Year 1999.

6) Corporate welfare corrupts the political process. One perverse, but
predictable outcome of a $100 billion-plus corporate welfare state is that
industry begins to view Congress, rather than consumers, as their real
customers. Moreover, industry has done an all effective job at protecting
their subsidies.

The sugar program is illustrative. In 1995 the program was under
assault. It appeared that the anti-corporate welfare forces, would finally
win a high profile fight on behalf of taxpayers and consumers. On the day
of the vote on the House floor, big sugar prevailed by just three votes.
It turned that 4 members of Congress who were original co-sponsors of the
legislation to kill the sugar subsidies voted against their own bill! Big
sugar had provided hundreds of thousands of dollars of campaign
contributions, with about a ten to one ratio going to members who voted
for the price supports versus those who voted against them. The Fanjul
family, owners of several large sugar farms in the Florida Everglades,
captures an estimated $60 million a year in artificial profits thanks to
price supports and import quotas. The Fanjuls are fierce defenders of the
sugar program and to protect the cash cow, since 1992 this one family has
contributed more than $350,000 to political campaigns.

7) Corporate welfare reduces American competitiveness. Business
subsidies, which are often said to be justified because they correct
distortions in the marketplace, create huge market distortions of their
own. The major effect of corporate subsidies is to divert credit and
capital to politically well-connected firms at the expense of their less
politically influential rivals. This is precisely what Japan has found
during it economic collapse over the past six years. In Japan the myth of
industrial policy as a competitiveness strategy has led to a 60 percent
reduction in the value of Japanese stock market since 1991.

Although it is said that corporate subsidies are necessary so that U.S.
firms can compete with their subsidized rivals in other nations, more than
90 percent of American businesses manage to stay in business without ever
receiving government grants, loan guarantees, insurance, or airplane seats
on Commerce Department trade missions around the globe. But they pay
higher taxes, which lowers their competitiveness, to support those
businesses that do.

Agricultural price supports are a case in point. Farm programs are
alleged to be critical to the survival of American farmers. The truth is
that of the 400 classified farm commodities, about two dozen receive more
than 90 percent of the assistance funds. Over 80 percent of the subsidies
enrich farmers with a net worth of more than half a million dollars.

Given that there are more than 1 million small and large businesses in
the U.S. today, the subsidies approach to prosperity is utterly futile.
The only effective way to enhance the competitiveness and productivity of
American industry is to create a level playing field, which minimizes
government interference in the marketplace and substantially reduces tax
rates and regulatory burdens. All of the federal government's efforts to
promote the big three U.S. automobile companies are inconsequential
compared with the regulatory burden on that industry, which now adds an
estimated $3,000 to the cost of a new car.

Nor are these programs needed to save jobs. The Commerce Department's
Advanced Technology Program is advertized as a job producer. But from
1990-94 the ATP provided more than $250 million to eight firms--Amoco
Corp., AT&T, Citicorp, DuPont, General Electric, General Motors, IBM,
and Motorola. Over those five years, these firms reduced their total U.S.
workforces by 329,000.

A NEW STRATEGY TO CUT CORPORATE SUBSIDIES

It is precisely the Republican's skittishness when it comes to pushing
big business off of the dole that gives their budget plans so little
credibility with the public. Liberals charge that Republicans want to cut
school children off the dole, but not the Fortune 500. If you can't push
AT&T and GE off the dole, how can we ever expect to get farmers,
unions, artists, and seniors to give up their subsidies?

By funding corporations with tax dollars the GOP only has reinforced
the public's suspicion that this is the party of the rich, the privileged,
and the well-connected. The discredited mercantilist policies of the
Commerce and Agriculture Departments are the antithesis of the free market
policies Republicans say they espouse.

The Democrats have been just as disappointing. The Progressive Policy
Institute has shown that corporate subsidies are regressive: most of the
benefits go to wealthy and well- connected businesses and shareholders. By
offering corporate welfare grants to Pillsbury, we are taxing relatively
less affluent workers and giving the money to relatively more affluent
Pillsbury stock owners. Where is the "fairness" in that?

What seems clear from the policy failures of the past five years is
that the corporate welfare empire in Washington cannot be toppled until
fiscally sensible forces on the left and the right forge an alliance to
purge the budget of corporate largesse. Chairman Kasich has heroically
attempted to do so in the past with his "Stop Corporate Welfare
Coalition." Only a handful of Republicans and Democrats would join the
Kasich crusade.

I would suggest that given the failure of both parties to wage a
genuine campaign against corporate pork, new strategies are necessary. I
would suggest the following seven.

1) "Pay for" tax cuts with corporate welfare cuts. It is imperative for
economic reasons that this Congress enact a large tax cut. The argument
against tax cuts is that they will benefit the wealthy. The best way to
blunt this attack is by combining tax cuts with corporate welfare cuts.
This could not be said to benefit the wealthy, since the wealthy are the
primary beneficiaries of business subsidies.

Let us eliminate the scandal-plagued Commerce and Energy Departments
and use the savings to eliminate the death tax. Let's get rid of corporate
welfare in the Defense and Agriculture Departments and use the savings to
cut the capital gains tax in half. Linking an economic reward, pro-growth
tax cuts, to reductions in corporate subsidies creates a constituency for
these program terminations. It also unambiguously benefits the overall
U.S. economy.

2) Revise the idea of a Corporate Welfare Elimination Commission. It is
a shame that we may need an unelected commission to do what Congress
should have the courage to do itself. But clearly Congress lacks that
courage. A military-base-closings type of Commission, where Congress has
to vote up or down on an entire package of corporate welfare spending
cuts, might be the most promising tactic. Congress should require that the
bipartisan Commission recommend at least $20 billion (per year) in
corporate welfare spending cuts. The Commission should report its findings
to Congress by July 1, 2000. Congress should be required to vote up or
down on this package within 60 days of its report.

A second commission could be appointed to deal with cleaning out
corporate welfare from the tax code. This Commission should identify
economically inefficient tax breaks--such as the Ethanol subsidy--and then
calculate how much we could reduce the payroll tax, the income tax, or the
corporate tax if we eliminated all of these loopholes. The basis of a good
tax system is a broad tax base with low rates. This second commission
could help get us there. But the point would be to make sure that every
dollar raised from tax loophole closings is uses to ratchet down excessive
tax rates.

3) Eliminate double-dipping. Enact a law that says that companies are
not entitled to more than one corporate welfare grant per year. Sorry, GE
and GM. One per customer.

4) Enact time limits on corporate welfare. With AFDC the Congress
enacted "two years and off." We should have a similar time limit on
corporate pork with companies.

5) Require firms to report to Congress all of the federal money they
receive each year and from what programs and agencies. Right now it is
virtually impossible to keep an inventory of what companies are getting
how much from how many agencies. The records simply do not exist. How much
total money does AT&T receive every year from taxpayers? The answer is
we don't know. But we should.

6) Prohibit private firms that receive federal grants, loans, or loan
guarantees from lobbying. Most Fortune 500 firms that receive federal aid
turn around and use a portion of their grant money to lobby for more and
continued grant money. This is simply welfare for lobbyists. We should say
to these companies: you may lobby, or you may take federal hand-outs. But
you may not do both. A few years ago several Democrats proposed this idea
when Republicans had proposed prohibiting nonprofits that receive federal
money from lobbying. The Democrats were right. Neither nonprofit nor for
profit companies should be able to take federal tax dollars and use them
to influence policy decisions.

7) Pass a law prohibiting any company or individual with an income of
more than $1 million to receive any federal subsidy. If the goal is to
stop welfare for the well-off, then let's stop talking about it and do
something about it. This law, in one stroke of the pen, would get the
wealthy off welfare. A federal subsidy should be defined as any grant,
loan, loan guarantee, or insurance provided by the government.

If Congress were to enact all 7 of these recommendations--but
particularly the 7th, I have no doubt that the corporate welfare state in
Washington would finally start to shrink--perhaps rapidly. The
beneficiaries would be taxpayers, workers, and the overall U.S. economy.
The corporate welfare model of economic development has been a stunning
failure in Europe and Japan. We should stop imitating the economic losers.